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Lackluster back-to-school season has retailers worried about upcoming holidays

Retailers are finding out that the critical back-to-school shopping season is not bringing people back into their stores the way they had anticipated. Rack it up to the latest example of cautious consumer spending.

"Although retailers would like to see year-over-year increases in consumer spending for back-to-school, flat spending levels in our current economic environment are probably not the worst answer," said Theresa Drew, managing partner of the San Diego office of Deloitte & Touche.

The consulting firm's survey of family spending plans for the current shopping season found that nearly 56 percent of local households plan to spend $200, about the same as last year. Nearly half of the families surveyed (46 percent) said they are likely to shop in a discount store over a department store.

The preference for discount stores has led shoppers to Wal-Mart (NYSE: WMT). The world's largest retailer reported that August same-store sales rose by 3.8 percent over the same month a year ago. Wal-Mart's success continues to come at the expense of other retailers.

"We do not expect to have positive (comparable) store sales in the fourth quarter, but we expect them to improve over what they have been to date," said Ron Hutchinson, chief restructuring officer at Kmart (NYSE: KM). The company is currently battling to emerge from the shadows of bankruptcy.

The comments sent shivers down the spine of many other companies. It was the first suggestion that the upcoming holiday season may prove as disappointing as the current sales period. The back-to-school shopping season is historically the second most profitable time of the year for retailers, lagging behind only holiday sales.

There are plenty of excuses for consumers to hold off on their school shopping. The anniversary of the terrorist attacks finds consumer confidence -- and spending -- at low levels.

"The Consumer Confidence Index is now at its lowest level since November 2001," said Lynn Franco of the Conference Board. "The month-to-month decline is a strong signal that business conditions have yet to turn around. It also suggests that consumer spending is not likely to gain momentum any time soon."

Unfortunately, the one thing that could turn confidence positive again remains illusive. New job creation continues to be anemic and layoffs are again on the rise. The report from the Labor Department on Friday said 39,000 new jobs were created in August. That compares to 118,067 job reduction announcements by U.S. companies during the same period, the highest level in six months.

When families shop for back-to-school equipment the list of priorities leans toward technology. A study by Texas Instruments (NYSE: TXN) found that 94 percent of parents surveyed felt that the use of technology has benefited their children's ability to learn.

"These survey results indicate that home computers have certainly become a back-to-school necessity," said Gary Shapiro, president of the Consumer Electronics Association. "Nearly three out of four Americans believe it is important for students to have a computer when they return to school this fall."

However, they may have to put up with last year's PC for a while longer.

"Back-to-school was little softer than we expected," said Michael Capellas, president of Hewlett-Packard (NYSE: HPQ) at a Salomon Smith Barney conference last week. "Normally we see about a 50 percent rise in demand, but this year it was only about 35 percent."

That analysis is compatible with a recent forecast from Forrester Research. The consulting firm says that 27 percent of college students plan to buy a new computer in the third quarter of 2002, compared with only 16 percent of the general population.

"With few radical new PC improvements, most consumers are satisfied with their computers, so the replacement cycle is lengthening," said Jeff Kolko of Forrester.

That leaves retailers wondering when consumers start to emerge from their current funk. According to a new report by Fitch Ratings, a "meaningful recovery in the retail sector will not take place until 2003 and weakened consumer confidence will likely dampen the holiday selling season."

However, another report says things may not be all that bad. A study by Standard & Poor's says current marketing conditions are really just a return to normalcy.

"In other words, we have gone from boom to average, not boom to bust. It doesn't feel that way. We became so used to prosperity we don't recognize normalcy," said the S&P report.

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Chamberlin's financial analysis column appears each Monday in the San Diego Daily Transcript. Chamberlin also reports daily on stocks and local business on NBC 7/39 and on "Money In The Morning" on KOGO 600 AM.

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